I would estimate that as many as 10% of the emails I receive from readers reference the books, classes, or radio shows of Dave Ramsey. For those unfamiliar, Dave Ramsey hosts a weekly radio show on personal finance topics and focuses on straightforward but tough plans for handling personal finance challenges.

The centerpiece of Dave’s philosophy is what he calls the “seven baby steps.” The “baby steps” form a step-by-step framework for people to move from living a paycheck-to-paycheck lifestyle (usually with lots of debt) to a lifestyle of financial independence.

It’s a solid plan to follow, but I see lots of emails from people who are struggling with particular aspects of the plan, so I thought it would make sense to walk through Dave’s “seven baby steps” and offer up some thoughts on each step.

In discussing these seven steps, I’m going to quote (in italics) the explanation of each baby step from DaveRamsey.com. The material in italics comes from the site; below the italics are my additional thoughts on that particular step.

Baby Step 1: $1,000 to start an emergency fund

An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.

This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you can handle it with your emergency fund. No more borrowing. It’s time to break the cycle of debt!

The first question people often have when they see this step is whether or not an emergency fund is even necessary at all. If you have credit, doesn’t that effectively work as an emergency fund? There are several problems with that approach, which I discussed in a recent post on why emergency funds are (almost) always vital. The biggest one is that you’re relying on a bank for your emergency fund – if that bank decides to pull your credit, you are in real trouble, and the moment they’re most likely to pull your credit is when the chips are down.

Another challenge that people face at this point is moving from paycheck-to-paycheck living – spending everything that you earn – to paying yourself first, or spending lessthan you earn. There’s no easy way to put it: you’re going to have to make changes in your spending.

My approach for that problem is to try lots of frugal tactics and discard the ones that are painful. Here’s a list of 100 great frugal tactics. It is vital that you try lots of them and then discard only the ones that don’t work. If you just choose a handful and find that they’re difficult for your life, you’re going to walk away with a bitter taste in your mouth. Try a bunch and toss the rest. I also suggest keeping track of how much each one actually saves you.

Baby Step 2: Pay off all debt using the Debt Snowball

List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.

The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.

The catch is that it’s a direct continuation of building up that $1,000 emergency fund. If you’ve discovered enough tactics in your life that you’re able to save up a small emergency fund, you just keep using those tactics to make extra payments on your debts according to your debt snowball. It might take you five months to build up that $1,000 emergency fund, but that’s okay. That means that you’re going to be able to apply about $200 a month as an extra payment to your higher interest debt – and that will make any debt melt and go away.

One important thing to note is that a home mortgage isn’t included here. The second step actually only includes non-mortgage debt. The reason is simple: home mortgages are pretty low interest compared to other debt types and if you wait until your mortgage is gone before moving on to other steps, you’re never going to take care of some important business. Leave your mortgage out of the equation (for now).

Baby Step 3: 3 to 6 months of expenses in savings

Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund. Ask yourself, “What would it take for me to live for three to six months if I lost my income?” Your answer to that question is how much you should save.

Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep these savings in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and life.

Why “three to six months”? It’s just a shorthand approximation that will work best for most families. The reason for having an emergency fund is to make sure that your loved ones aren’t adversely affected when emergencies happen, particularly when several happen at once (as is often the case).

My belief is that it makes sense to have a smaller emergency fund if you’re single and don’t have children, but the addition of a spouse and particularly of children means you need more emergency money because you have a much greater chance of an emergency pile-up. I generally encourage people to have one month of living expenses saved plus another month’s worth for each person living in your home. So, if you are married with three kids, six months of living expenses is a great target.

When you reach this step, you’ll have no payments—except the house—and a fully funded emergency fund. Now it’s time to get serious about building wealth.

Dave suggests investing 15% of your household income into Roth IRAs and pre-tax retirement plans. Don’t invest more than that because the extra money will help you complete the next two steps: college savings and paying off your home early.

Why shouldn’t you invest less than 15%? Some people choose to invest a small amount, if anything, because they want to get a child through school or pay off the home in a hurry. But the kids’ degrees won’t feed you at retirement, and if you throw all your money into your mortgage at this point, you’ll end up having to sell the house and buy the book 72 Ways to Prepare Alpo and Love It. Bad plan.

That 15% number is yet another example of a single number to make things easy. In truth, it really depends on how early you’re starting and how early you want to retire.

I think 15% of your household income is a good number to start with if you’re 25 years from when you plan to retire. That can include any matching funds from employers. If you’re closer than that, then you need to raise the number – I’d add 1% per year. So, if you’re only 15 years from retirement, I wouldn’t be saving less than 25%. If you get down to about the ten year mark, all bets are off – you need to be saving everything.

If you’re farther out than that, I’d feel safe trimming off 1% for every three additional years. For example, if you’re 40 years from retirement, you should be pretty safe locking in 10% of your income each year for retirement.

Baby Step 5: College funding for children

By this point, you should have already started Baby Step 4—investing 15% of your income—before saving for college. Whether you are saving for you or your child to go to college, you need to start now.

In order to have enough money saved for college, you need to have a goal. Determine how much per month you should be saving at 12% interest in order to have enough for college. If you save at 12% and inflation is at 4%, then you are moving ahead of inflation at a net of 8% per year!

The best way to save for college is with Education Savings Accounts (ESAs) and 529 plans. Remember, college is possible without loans!

This is the only step that I view as “optional.” Of course, it assumes that you have children, but it also assumes that you feel it necessary to pay for some or all of your children’s college education.

There’s also the question of whether or not you should pay for college. Do your children learn valuable lessons in having to pay for their own education? I think it depends a lot on the child and what life lessons they’ve truly learned.

I don’t have an answer to this question, but I certainly understand both sides of the coin. I think it’s a discussion that parents need to have without the assumption that saving for college “must” be the right thing to do.

Baby Step 6: Pay off your house early

Now it’s time to begin chunking all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.

As you attack this last debt, you will gain momentum much like you did back in the second step of the debt snowball. Remember, having absolutely no payments is totally within your reach!

Many people argue against ever paying off a low-interest mortgage because there are investments – such as a broad stock market investment – that will provide a better long-term return than paying off a home mortgage. In other words, they advocate skipping step 6 and moving on to step 7 even if you have a mortgage.

There are two problems with that approach. One is cash flow: as soon as that mortgage is gone, you’re going to have a much bigger gap between your income and your bills. With such a big gap, you can easily take on life changes of all kinds.

The other is risk: if you invest in something with a bigger return than your mortgage, you’re taking on significant risk. If you make extra payments on a 5% mortgage, you know you’re going to get that 5% return on your money. If you invest in stocks hoping to get that 7% long term return, you might not get that at all, particularly over the short term.

You’re also running some risk with the housing market – if you’re in a declining market and you choose to put your cash into something else, you have a good chance of being “upside down” in your mortgage, which can be disastrous if you suddenly need to move because of a career change.

Baby Step 7: Build wealth and give!

It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It’s really the only way to live!

Golda Meir says, “You can’t shake hands with a clenched fist.” Vow to never hold your money so tightly that you never give any away. Hoarding money is not the way to wealth. Save for yourself, save for your family’s future, and be gracious enough to bless others. You can do all three at the same time.

Investing once you’re debt free is an extremely deep topic, one that entire sections of libraries cover in depth. If you’re looking for a starting point, I strongly suggest The Bogleheads’ Guide to Investing. That one volume not only sums up the investing philosophy I have, but it also explains exactly how to implement it.

Charity is another difficult topic. Giving your money away is hard to justify strictly in terms of one’s net worth. The reasons for it are non-financial. I’ve discussed the case for charity in the past, but it remains one of those things that has to come from your heart. I do encourage everyone in this situation to find a charity that speaks to them in some way and try to get involved.

Final Thoughts

The “seven baby steps” make up a pretty sensible personal finance plan. It’s not perfect and it doesn’t match everyone’s needs, but it does provide a roadmap that works for the financial situations of most people.

The challenge comes from the self-discipline that it takes to actually follow the steps. I view self-discipline, bad habit breaking, and good habit building as the greatest challenges of personal finance. Once you master those things and reach a higher level of self-control, not only does personal finance become easier, so do many other aspects of your life, including the ability to earn more money.

The baby steps are a good guidebook, but the real project is improving yourself.